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FIRST DIVISION

[G.R. No. 166018. June 4, 2014.]

THE HONGKONG AND SHANGHAI BANKING


CORPORATION LIMITED-PHILIPPINE BRANCHES,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.

[G.R. No. 167728. June 4, 2014.]

THE HONGKONG AND SHANGHAI BANKING


CORPORATION LIMITED-PHILIPPINE BRANCHES,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.

DECISION

LEONARDO-DE CASTRO, J : p

These petitions for review on certiorari 1(1) assail the Decision 2(2) and
Resolution dated July 8, 2004 and October 25, 2004, respectively, of the Court of
Appeals in CA-G.R. SP No. 77580, as well as the Decision 3(3) and Resolution
dated September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals
in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly
reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA
Case Nos. 5951 4(4) and 6009, 5(5) respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine
Branches (HSBC). The corresponding Resolutions, on the other hand, denied the
respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its


investor-clients, corporate and individual, resident or non-resident of the
Philippines, with respect to their passive investments in the Philippines,
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particularly investments in shares of stocks in domestic corporations. As a
custodian bank, HSBC serves as the collection/payment agent with respect to
dividends and other income derived from its investor-clients' passive investments.
6(6) IHEaAc

HSBC's investor-clients maintain Philippine peso and/or foreign currency


accounts, which are managed by HSBC through instructions given through
electronic messages. The said instructions are standard forms known in the
banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts and to pay the
purchase price therefor upon receipt of the securities. 7(7)

Pursuant to the electronic messages of its investor-clients, HSBC purchased


and paid Documentary Stamp Tax (DST) from September to December 1997 and
also from January to December 1998 amounting to P19,572,992.10 and
P32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P6,981,447.90


October 1997 6,209,316.60
November 1997 3,978,510.30
December 1997 2,403,717.30
–––––––––––––
Total P19,572,992.10
============

B. January to December 1998

January 1998 P3,328,305.60


February 1998 4,566,924.90
March 1998 5,371,797.30
April 1998 4,197,235.50
May 1998 2,519,587.20
June 1998 2,301,333.00
July 1998 1,586,404.50
August 1998 1,787,359.50
September 1998 1,231,828.20
October 1998 1,303,184.40
November 1998 2,026,379.70
December 1998 2,684,097.50
––––––––––––––
Total P32,904,437.30
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 2
=============

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that
instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to
DST. BIR Ruling No. 132-99 reads: DSHcTC

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA


& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

Attn: Atty. Tomas C. Toledo


Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of
your clients, the CITIBANK & STANDARD CHARTERED BANK, for a
ruling as to whether or not the electronic instructions involving the following
transactions of residents and non-residents of the Philippines with respect to
their local or foreign currency accounts are subject to documentary stamp tax
under Section 181 of the 1997 Tax Code, viz.:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the


Philippines to either:

(i) debit its local or foreign currency account and to pay a


named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for


deposit into its account and to pay a named recipient
in the Philippines."

The foregoing transactions are carried out under instruction from


abroad and [do] not involve actual fund transfer since the funds are already in
the Philippine accounts. The instructions are in the form of electronic
messages (i.e., SWIFT MT 100 or MT 202 and/or MT 521). In both cases,
the payment is against the delivery of investments purchased. The purchase of
investments and the payment comprise one single transaction. DST has
already been paid under Section 176 for the investment purchase. cSEaTH

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B. Other transactions:

An overseas client sends an instruction to its bank in the


Philippines to either:

(i) debit its local or foreign currency account and to pay a


named recipient, who may be another bank, a
corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for


deposit to its account and to pay a named recipient,
who may be another bank, a corporate entity or an
individual in the Philippines."

The above instruction is in the form of an electronic message (i.e.,


SWIFT MT 100 or MT 202) or tested cable, and may not refer to any
particular transaction.

The opening and maintenance by a non-resident of local or foreign


currency accounts with a bank in the Philippines is permitted by the Bangko
Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997


Tax Code, which provides that —

SEC. 181. Stamp Tax Upon Acceptance of Bills of


Exchange and Others. — Upon any acceptance or payment of any bill
of exchange or order for the payment of money purporting to be
drawn in a foreign country but payable in the Philippines, there shall
be collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (P200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency.
(Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order


for payment purporting to be drawn in a foreign country but payable in the
Philippines. cTDIaC

Under the foregoing provision, the documentary stamp tax shall be


levied on the instrument, i.e., a bill of exchange or order for the payment of
money, which purports to draw money from a foreign country but payable in
the Philippines. In the instant case, however, while the payor is residing
outside the Philippines, he maintains a local and foreign currency account in
the Philippines from where he will draw the money intended to pay a named
recipient. The instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently,
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there is no negotiable instrument to be made, signed or issued by the payee.
In the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the same do not
involve any transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such instruction
could be considered only as a memorandum and shall be entered as such in its
books of accounts. The actual debiting of the payor's account, local or
foreign currency account in the Philippines, is the actual transaction that
should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of


money from a bank deposit, local or foreign currency account, is not subject
to DST, unless the account so maintained is a current or checking account, in
which case, the issuance of the check or bank drafts is subject to the
documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In
the instant case, and subject to the physical impossibility on the part of the
payor to be present and prepare and sign an instrument purporting to pay a
certain obligation, the withdrawal and payment shall be made in cash. In this
light, the withdrawal shall not be subject to documentary stamp tax. The case
is parallel to an automatic bank transfer of local funds from a savings account
to a checking account maintained by a depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for
deposit to the payee's account and thereafter upon instruction of the
non-resident depositor-payor, through an electronic message, the depository
bank to debit his account and pay a named recipient shall not be subject to
documentary stamp tax. HDAaIS

It should be noted that the receipt of funds from another local bank in
the Philippines by a local depository bank for the account of its client residing
abroad is part of its regular banking transaction which is not subject to
documentary stamp tax. Neither does the receipt of funds makes the recipient
subject to the documentary stamp tax. The funds are deemed to be part of the
deposits of the client once credited to his account, and which, thereafter can
be disposed in the manner he wants. The payor-client's further instruction to
debit his account and pay a named recipient in the Philippines does not
involve transfer of funds from abroad. Likewise, as stated earlier, such debit
of local or foreign currency account in the Philippines is not subject to the
documentary stamp tax under the aforementioned Section 181 of the Tax
Code.

In the light of the foregoing, this Office hereby holds that the
instruction made through an electronic message by non-resident payor-client
to debit his local or foreign currency account maintained in the Philippines
and to pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the 1997 Tax Code. Such
being the case, such electronic instruction purporting to draw funds from a
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 5
local account intended to be paid to a named recipient in the Philippines is
not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as


represented. However, if upon investigation it shall be disclosed that the facts
are different, this ruling shall be considered null and void. CSAcTa

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO


Commissioner of Internal Revenue
8(8)

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of P19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering September
to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative


claim for the refund of the amount of P32,904,437.30 allegedly representing
erroneously paid DST to the BIR for the period covering January to December
1998. TacSAE

As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951 and 6009,
respectively, in order to suspend the running of the two-year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax credit
certificate in favor of HSBC in the reduced amounts of P30,360,570.75 in CTA
Case No. 6009 and P16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently substantiated with documentary
evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit
because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic
message instructions transmitted by HSBC's non-resident investor-clients:

The instruction made through an electronic message by a non-resident


investor-client, which is to debit his local or foreign currency account in the
Philippines and pay a certain named recipient also residing in the Philippines
is not the transaction contemplated in Section 181 of the Code. In this case,
the withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank. The act of debiting the
account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under Section
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180 of the same Code. These electronic message instructions cannot be
considered negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred (Words and Phrases). aDcTHE

These instructions are considered as mere memoranda and entered as


such in the books of account of the local bank, and the actual debiting of the
payor's local or foreign currency account in the Philippines is the actual
transaction that should be properly entered as such. 9(9)

The respective dispositive portions of the Decisions dated May 2, 2002 in


CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition


for Review is PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in
favor of Petitioner the amount of P30,360,570.75 representing erroneous
payment of documentary stamp tax for the taxable year 1998. 10(10)

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is


hereby partially granted. Accordingly, respondent is hereby ORDERED to
REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE
in favor of the petitioner in the reduced amount of P16,436,395.83
representing erroneously paid documentary stamp tax for the months of
September 1997 to December 1997. 11(11)

However, the Court of Appeals reversed both decisions of the CTA and
ruled that the electronic messages of HSBC's investor-clients are subject to DST.
The Court of Appeals explained: EIcSTD

At bar, [HSBC] performs custodial services in behalf of its


investor-clients as regards their passive investments in the Philippines mainly
involving shares of stocks in domestic corporations. These investor-clients
maintain Philippine peso and/or foreign currency accounts with [HSBC].
Should they desire to purchase shares of stock and other investments
securities in the Philippines, the investor-clients send their instructions and
advises via electronic messages from abroad to [HSBC] in the form of
SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local
or foreign currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section
181 of the NIRC, [HSBC] was thus required to pay [DST] based on its
acceptance of these electronic messages — which, as [HSBC] readily admits
in its petition filed before the [CTA], were essentially orders to pay the
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 7
purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the
[DST] from [HSBC] considering that the said tax was levied against the
acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic messages
may be equated as a written document and thus be subject to tax is beside the
point. As We have already stressed, Section 181 of the law cited earlier
imposes the [DST] not on the bill of exchange or order for payment of
money but on the acceptance or payment of the said bill or order. The
acceptance of a bill or order is the signification by the drawee of its assent to
the order of the drawer to pay a given sum of money while payment implies
not only the assent to the said order of the drawer and a recognition of the
drawer's obligation to pay such aforesaid sum, but also a compliance with
such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA
693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA
257 [1992]).

What is vital to the valid imposition of the [DST] under Section 181
is the existence of the requirement of acceptance or payment by the drawee
(in this case, [HSBC]) of the order for payment of money from its
investor-clients and that the said order was drawn from a foreign country and
payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax
being imposed in the case at bar. In Philippine Home Assurance Corporation
vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that
[DST is] levied on the exercise by persons of certain privileges conferred by
law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments, independently of the legal
status of the transactions giving rise thereto. In the same case, the High
Court also declared — citing Du Pont vs. United States (300 U.S. 150, 153
[1936])

The tax is not upon the business transacted but is an excise


upon the privilege, opportunity, or facility offered at exchanges for
the transaction of the business. It is an excise upon the facilities used
in the transaction of the business separate and apart from the business
itself. . . . . STIcaE

To reiterate, the subject [DST] was levied on the acceptance and


payment made by [HSBC] pursuant to the order made by its client-investors
as embodied in the cited electronic messages, through which the herein
parties' privilege and opportunity to transact business respectively as drawee
and drawers was exercised, separate and apart from the circumstances and
conditions related to such acceptance and subsequent payment of the sum of
money authorized by the concerned drawers. Stated another way, the [DST]
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 8
was exacted on [HSBC's] exercise of its privilege under its drawee-drawer
relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for payment may be
done in writing by the drawee in the bill or order itself, or in a separate
instrument (Prudential Bank vs. Intermediate Appellate Court, supra.) Here,
[HSBC]'s acceptance of the orders for the payment of money was veritably
'done in writing in a separate instrument' each time it debited the local or
foreign currency accounts of its client-investors pursuant to the latter's
instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or
facilities covered by the tax — in this case, the acceptance by [HSBC] of the
order for payment of money sent by the client-investors through electronic
messages. . . . . 12(12)

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to HSBC, in
the absence of abuse or improvident exercise of authority, the CTA's ruling should
not have been disturbed as the CTA is a highly specialized court which performs
judicial functions, particularly for the review of tax cases. HSBC further argues
that the Commissioner of Internal Revenue had already settled the issue on the
taxability of electronic messages involved in these cases in BIR Ruling No. 132-99
and reiterated in BIR Ruling No. DA-280-2004. 13(13)

The Commissioner of Internal Revenue, on the other hand, claims that


Section 181 of the 1997 Tax Code imposes DST on the acceptance or payment of a
bill of exchange or order for the payment of money. The DST under Section 18 of
the 1997 Tax Code is levied on HSBC's exercise of a privilege which is
specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing
law and long standing administrative practice, respondent is not barred from
questioning his own revenue ruling. Tax refunds like tax exemptions are strictly
construed against the taxpayer. 14(14)

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax
Code is levied on the acceptance or payment of "a bill of exchange purporting to
be drawn in a foreign country but payable in the Philippines" and that "a bill of
exchange is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money to
order or to bearer." A bill of exchange is one of two general forms of negotiable

Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 9
instruments under the Negotiable Instruments Law. 15(15) ScaAET

The Court further agrees with the CTA that the electronic messages of
HSBC's investor-clients containing instructions to debit their respective local or
foreign currency accounts in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181 of
the Tax Code as such instructions are "parallel to an automatic bank transfer of
local funds from a savings account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the finding of the CTA that the
electronic messages "cannot be considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be transferred" and that the said
electronic messages are "mere memoranda" of the transaction consisting of the
"actual debiting of the [investor-client-]payor's local or foreign currency account in
the Philippines" and "entered as such in the books of account of the local bank,"
HSBC. 16(16)

More fundamentally, the instructions given through electronic messages


that are subjected to DST in these cases are not negotiable instruments as they do
not comply with the requisites of negotiability under Section 1 of the Negotiable
Instruments Law, which provides:

Sec. 1. Form of negotiable instruments. — An instrument to be


negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or


drawer;

(b) Must contain an unconditional promise or order to pay


a sum certain in money;

(c) Must be payable on demand, or at a fixed or


determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he


must be named or otherwise indicated therein with
reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed


drawers of a bill of exchange; they do not contain an unconditional order to pay a
sum certain in money as the payment is supposed to come from a specific fund or
account of the investor-clients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment drawn abroad

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and made payable here in the Philippines, there could have been no acceptance or
payment that will trigger the imposition of the DST under Section 181 of the Tax
Code. TaDSHC

Section 181 of the 1997 Tax Code, which governs HSBC's claim for tax
refund for taxable year 1998 subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and


Others. — Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred
pesos (P200), or fractional part thereof, of the face value of any such bill of
exchange, or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC's
claim for tax refund for DST paid during the period September to December 1997
and subject of G.R. No. 166018, is worded exactly the same as its counterpart
provision in the 1997 Tax Code quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904,
17(17) which provided:

SECTION 117. The acceptor or acceptors of any bill of


exchange or order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but payable in the
Philippine Islands, shall, before paying or accepting the same, place
thereupon a stamp in payment of the tax upon such document in the same
manner as is required in this Act for the stamping of inland bills of exchange
or promissory notes, and no bill of exchange shall be paid nor negotiated until
such stamp shall have been affixed thereto. 18(18) (Emphasis supplied.)

It then became Section 30 (h) of the 1914 Tax Code: 19(19)

SEC. 30. Stamp tax upon documents and papers. — Upon


documents, instruments, and papers, and upon acceptances, assignments,
sales, and transfers of the obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction so had or
accomplished shall be paid as hereinafter prescribed, by the persons making,
signing, issuing, accepting, or transferring the same, and at the time such act
is done or transaction had:

xxx xxx xxx

(h) Upon any acceptance or payment upon acceptance of any bill of


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exchange or order for the payment of money purporting to be drawn
in a foreign country but payable in the Philippine Islands, on each two
hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange or order, or the Philippine equivalent of such value, if
expressed in foreign currency, two centavos[.] (Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue


Regulations No. 26, 20(20) as amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts,


and all other kinds of orders for the payment of money, payable at sight or on
demand, or after a specific period after sight or from a stated date." IcDCaT

SEC. 46. Bill of Exchange, etc. — When any bill of exchange


or order for the payment of money drawn in a foreign country but
payable in this country whether at sight or on demand or after a
specified period after sight or from a stated date, is presented for
acceptance or payment, there must be affixed upon acceptance or
payment of documentary stamp equal to P0.02 for each P200 or fractional
part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939, 21(21)
which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and


Others. — Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of four centavos on each two hundred pesos, or
fractional part thereof, of the face value of any such bill of exchange or order,
or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code, 22(22) as amended by
Presidential Decree Nos. 1457 and 1959, which, as stated earlier, was worded
exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and


others. — Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or
fractional part thereof, of the face value of any such bill of exchange, or
order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.) TIHCcA

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The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years. The identical text and
common history of Section 230 of the 1977 Tax Code, as amended, and the 1997
Tax Code, as amended, show that the law imposes DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer


obligations, rights or properties incident thereto. 23(23) Under Section 173 of the
1997 Tax Code, the persons primarily liable for the payment of the DST are those
(1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the taxable
documents, instruments or papers. 24(24)

In general, DST is levied on the exercise by persons of certain privileges


conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of such
privileges, the exercise of which, as effected through the issuance of particular
documents, are subject to the payment of DST are leases of lands, mortgages,
pledges and trusts, and conveyances of real property. 25(25)

As stated above, Section 230 of the 1977 Tax Code, as amended, now
Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance or (b)
the payment of a foreign bill of exchange or order for the payment of money that
was drawn abroad but payable in the Philippines. In other words, it levies DST as
an excise tax on the privilege of the drawee to accept or pay a bill of exchange or
order for the payment of money, which has been drawn abroad but payable in the
Philippines, and on the corresponding privilege of the drawer to have acceptance
of or payment for the bill of exchange or order for the payment of money which it
has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange. 26(26) Acceptance of a bill of


exchange has a very definite meaning in law. 27(27) In particular, Section 132 of
the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. — The


acceptance of a bill [of exchange] 28(28) is the signification by the drawee of
his assent to the order of the drawer. The acceptance must be in writing and
signed by the drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money. HcSaTI

Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee's consent
to the drawer's order to pay money and the expression of the drawee's promise to
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 13
pay. It is "the act by which the drawee manifests his consent to comply with the
request contained in the bill of exchange directed to him and it contemplates an
engagement or promise to pay." 29(29) Once the drawee accepts, he becomes an
acceptor. 30(30) As acceptor, he engages to pay the bill of exchange according to
the tenor of his acceptance. 31(31)

Acceptance is made upon presentment of the bill of exchange, or within 24


hours after such presentment. 32(32) Presentment for acceptance is the production
or exhibition of the bill of exchange to the drawee for the purpose of obtaining his
acceptance. 33(33)

Presentment for acceptance is necessary only in the instances where the law
requires it. 34(34) In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to presentment
for payment.

Presentment for payment is the presentation of the instrument to the person


primarily liable for the purpose of demanding and obtaining payment thereof.
35(35)

Thus, whether it be presentment for acceptance or presentment for payment,


the negotiable instrument has to be produced and shown to the drawee for
acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of


bills of exchange or orders for the payment of money that have been drawn abroad
but payable in the Philippines) that is subjected to DST under Section 181 of the
1997 Tax Code is done after presentment for acceptance or presentment for
payment, respectively. In other words, the acceptance or payment of the subject
bill of exchange or order for the payment of money is done when there is
presentment either for acceptance or for payment of the bill of exchange or order
for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases,
the electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter's local and foreign currency accounts and
to pay the purchase price of shares of stock or investment in securities do not
properly qualify as either presentment for acceptance or presentment for payment.
There being neither presentment for acceptance nor presentment for payment, then
there was no acceptance or payment that could have been subjected to DST to
speak of. HSIADc

Indeed, there had been no acceptance of a bill of exchange or order for the
payment of money on the part of HSBC. To reiterate, there was no bill of
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 14
exchange or order for the payment drawn abroad and made payable here in the
Philippines. Thus, there was no acceptance as the electronic messages did not
constitute the written and signed manifestation of HSBC to a drawer's order to pay
money. As HSBC could not have been an acceptor, then it could not have made
any payment of a bill of exchange or order for the payment of money drawn
abroad but payable here in the Philippines. In other words, HSBC could not have
been held liable for DST under Section 230 of the 1977 Tax Code, as amended,
and Section 181 of the 1997 Tax Code as it is not "a person making, signing,
issuing, accepting, or, transferring" the taxable instruments under the said
provision. Thus, HSBC erroneously paid DST on the said electronic messages for
which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions


dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA
Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

Sereno, C.J., Bersamin, Villarama, Jr. and Reyes, JJ., concur.

Footnotes
1. Under Rule 45 of the Rules of Court.
2. Rollo (G.R. No. 166018), pp. 27-37; penned by Associate Justice Conrado M.
Vasquez, Jr. with Associate Justices Josefina Guevara-Salonga and Fernanda
Lampas Peralta, concurring.
3. Rollo (G.R. No. 167728), pp. 31-41; penned by Associate Justice Marina L.
Buzon with Associate Justices Mario L. Guariña III and Hakim S. Abdulwahid,
concurring.
4. Rollo (G.R. No. 166018), pp. 39-48.
5. Rollo (G.R. No. 167728), pp. 48-64.
6. Id. at 32.
7. Id.
8. Id. at 44-47.
9. Id. at 55.
10. Id. at 63.
11. Rollo (G.R. No. 166018), p. 47.
12. Rollo (G.R. No. 167728), pp. 37-39.
13. Id. at 174-187; Memorandum for HSBC, pp. 13-26.
14. Memorandum for the Commissioner of Internal Revenue, Rollo (G.R. No.
166018), pp. 154-161.
15. The other type is the promissory note. See Titles II and III, Negotiable Instruments
Law.
16. Rollo (G.R. No. 167728), p. 55.
17. Act No. 1189.

Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 15
18. SECTION 116. There shall be levied, collected, and paid for and in respect to the
several bonds, debentures, or certificates of stock and of indebtedness, and other
documents, instruments, matters, and things mentioned and described in this
section, or for or in respect to the vellum, parchment, or paper upon which such
instruments, matters, or things or any of them shall be written or printed by any
person or persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Second. . . . (b) on all bills of exchange (between points within the Philippine
Islands), drafts and certificates of deposit drawing interest, or order for the
payment of any sum of money otherwise than at sight or on demand, and on all
promissory notes, except bank notes issued for circulation, and on each renewal of
any such note, on each two hundred pesos or fractional part thereof, of the face
value of any such bill of exchange, draft, certificate of deposit, or note, two
centavos, . . . .
19. Act No. 2339, February 27, 1914.
20. Dated March 26, 1924. Entitled "Revised Documentary Stamp Tax Regulations."
21. Commonwealth Act No. 466, June 15, 1939.
22. Presidential Decree No. 1158, June 3, 1977.
23. Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, 522
Phil. 693, 698 (2006).
24. Philacor Credit Corporation v. Commissioner of Internal Revenue, G.R. No.
169899, February 6, 2013, 690 SCRA 28, 37.
25. Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, supra
note 23 at 698-699.
26. Philacor Credit Corporation v. Commissioner of Internal Revenue, supra note 24.
A bill of exchange is defined under Section 126 of the Negotiable Instruments Law
as follows:
Sec. 126. Bill of exchange, defined. — A bill of exchange is an unconditional
order in writing addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
27. Id. In this case, the Court stated that "acceptance" has "a narrow definition" with
respect to foreign bills of exchange, and it is not limited to the common usage of
the word "accepting" as in receiving.
28. The relevant portion of Section 191 of the Negotiable Instruments Law provides
that "Bill" "means bill of exchange."
29. Hunt v. Security State Bank, 179 Pac. 248 (1919), cited in De Leon, Hector, The
Philippine Negotiable Instruments Law (and Allied Laws) Annotated (2010
edition), p. 343.
30. De Leon, id. at 239.
31. See Section 62, Negotiable Instruments Law.
32. Sec. 136 of the Negotiable Instruments Law provides:
Sec. 136. Time allowed drawee to accept. — The drawee is allowed
twenty-four hours after presentment in which to decide whether or not he will
accept the bill; the acceptance, if given, dates as of the day of presentation.
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 16
33. Campos, Jose Jr., Notes and Selected Cases on Negotiable Instruments Law (5th
Edition), pp. 709-710.
34. Section 143 of the Negotiable Instruments Law enumerates the cases where
presentment for acceptance is essential:
Sec. 143. When presentment for acceptance must be made. — Presentment
for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable.
35. Campos, supra note 33, p. 715.

Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 17
Endnotes

1 (Popup - Popup)
1. Under Rule 45 of the Rules of Court.

2 (Popup - Popup)
2. Rollo (G.R. No. 166018), pp. 27-37; penned by Associate Justice Conrado M.
Vasquez, Jr. with Associate Justices Josefina Guevara-Salonga and Fernanda
Lampas Peralta, concurring.

3 (Popup - Popup)
3. Rollo (G.R. No. 167728), pp. 31-41; penned by Associate Justice Marina L.
Buzon with Associate Justices Mario L. Guariña III and Hakim S. Abdulwahid,
concurring.

4 (Popup - Popup)
4. Rollo (G.R. No. 166018), pp. 39-48.

5 (Popup - Popup)
5. Rollo (G.R. No. 167728), pp. 48-64.

6 (Popup - Popup)
6. Id. at 32.

7 (Popup - Popup)
7. Id.

8 (Popup - Popup)
8. Id. at 44-47.

9 (Popup - Popup)
9. Id. at 55.
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 18
10 (Popup - Popup)
10. Id. at 63.

11 (Popup - Popup)
11. Rollo (G.R. No. 166018), p. 47.

12 (Popup - Popup)
12. Rollo (G.R. No. 167728), pp. 37-39.

13 (Popup - Popup)
13. Id. at 174-187; Memorandum for HSBC, pp. 13-26.

14 (Popup - Popup)
14. Memorandum for the Commissioner of Internal Revenue, Rollo (G.R. No.
166018), pp. 154-161.

15 (Popup - Popup)
15. The other type is the promissory note. See Titles II and III, Negotiable Instruments
Law.

16 (Popup - Popup)
16. Rollo (G.R. No. 167728), p. 55.

17 (Popup - Popup)
17. Act No. 1189.

18 (Popup - Popup)
18. SECTION 116. There shall be levied, collected, and paid for and in respect to the
several bonds, debentures, or certificates of stock and of indebtedness, and other
documents, instruments, matters, and things mentioned and described in this
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 19
section, or for or in respect to the vellum, parchment, or paper upon which such
instruments, matters, or things or any of them shall be written or printed by any
person or persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Second. . . . (b) on all bills of exchange (between points within the Philippine
Islands), drafts and certificates of deposit drawing interest, or order for the
payment of any sum of money otherwise than at sight or on demand, and on all
promissory notes, except bank notes issued for circulation, and on each renewal of
any such note, on each two hundred pesos or fractional part thereof, of the face
value of any such bill of exchange, draft, certificate of deposit, or note, two
centavos, . . . .

19 (Popup - Popup)
19. Act No. 2339, February 27, 1914.

20 (Popup - Popup)
20. Dated March 26, 1924. Entitled "Revised Documentary Stamp Tax Regulations."

21 (Popup - Popup)
21. Commonwealth Act No. 466, June 15, 1939.

22 (Popup - Popup)
22. Presidential Decree No. 1158, June 3, 1977.

23 (Popup - Popup)
23. Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, 522 Phil.
693, 698 (2006).

24 (Popup - Popup)
24. Philacor Credit Corporation v. Commissioner of Internal Revenue, G.R. No.
169899, February 6, 2013, 690 SCRA 28, 37.

25 (Popup - Popup)

Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 20
25. Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, supra
note 23 at 698-699.

26 (Popup - Popup)
26. Philacor Credit Corporation v. Commissioner of Internal Revenue, supra note 24.
A bill of exchange is defined under Section 126 of the Negotiable Instruments Law
as follows:
Sec. 126. Bill of exchange, defined. — A bill of exchange is an unconditional
order in writing addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.

27 (Popup - Popup)
27. Id. In this case, the Court stated that "acceptance" has "a narrow definition" with
respect to foreign bills of exchange, and it is not limited to the common usage of
the word "accepting" as in receiving.

28 (Popup - Popup)
28. The relevant portion of Section 191 of the Negotiable Instruments Law provides
that "Bill" "means bill of exchange."

29 (Popup - Popup)
29. Hunt v. Security State Bank, 179 Pac. 248 (1919), cited in De Leon, Hector, The
Philippine Negotiable Instruments Law (and Allied Laws) Annotated (2010
edition), p. 343.

30 (Popup - Popup)
30. De Leon, id. at 239.

31 (Popup - Popup)
31. See Section 62, Negotiable Instruments Law.

32 (Popup - Popup)
32. Sec. 136 of the Negotiable Instruments Law provides:
Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 21
Sec. 136. Time allowed drawee to accept. — The drawee is allowed
twenty-four hours after presentment in which to decide whether or not he will
accept the bill; the acceptance, if given, dates as of the day of presentation.

33 (Popup - Popup)
33. Campos, Jose Jr., Notes and Selected Cases on Negotiable Instruments Law (5th
Edition), pp. 709-710.

34 (Popup - Popup)
34. Section 143 of the Negotiable Instruments Law enumerates the cases where
presentment for acceptance is essential:
Sec. 143. When presentment for acceptance must be made. — Presentment
for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee.
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable.

35 (Popup - Popup)
35. Campos, supra note 33, p. 715.

Copyright 1994-2018 CD Technologies Asia, Inc. Jurisprudence 1901 to 2018 First Release 22

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